Accounting Changes

Many investors believe they know everything there may be to know of companies, but the SEC made that all happen in its ruling about disclosers in its financial statements in 2002. The SEC now was able to make it possible for everyone, not just insiders to see the company for who they truly were. No creative accounting policy could be done with about a thorough explanation in the companies annual 10-K report. The reason many of us understand these important changes are from the demise of companies as Enron, and WorldCom; which both used creative accounting techniques that were never disclosed to its shareholders. The rules suddenly began to change and critical accounting polices began to become very important. The importance of these policies is not only to clarify the data for investors, but also to explain where the company feels its changes are positive or negatively effecting the company.

The policies are given a specific criterion that is to be met, but because of such diversity amongst accounting methods used in companies, the SEC leaves a broad spectrum of information that must be clarified to the investors. Data ranging from qualitative changes in internal policies that may included new management or lay offs, which will then have an effect on the quantitative data that all investors hone into. Now this quantitative data must also be explain in mathematical, from ratios, to percentage changes from investors to see the real data. The data is essential to any investors who are possibly looking into these companies. The policies are going to offer transparency to all financial data and for data that in the past was not explain, sets the frame work to be explained and clarified. Many of the critical accounting policies are explaining methods for areas that company’s estimate their numerical values, therefore the SEC saw it as a grey area, and is now regulating the information to be explained in depth. These estimations can range from simple inventory changes to large estimations of sales and other areas that may cause changes in profit margins. The greatest area for investors is the methodology used by companies to estimate future revenues and progress. With the disclosure of the accounting policies many issues are resolved, because the method is explained along with the risk factors that may affect the profitability of the company as a whole. Every companies has its effective way of calculating its estimations as well as its other key financial data, but to outsiders that information is unclear, and by explaining these areas, investors can the have a better grasp of how a company actually operations.

Goldman Sachs(GS), a leader in the financial industry, discloses its critical accounting principals in its annual 10-K report. In this report, all key information is explained in accordance with the SEC filing requirements. The first of the many listings is fair value. GS uses this accounting principal to recognized unrealized gains and losses when measuring its financial instruments. The company also splits this into three more precise categories, cash trading instruments, derivative instruments and principal investments. Cash trading is a key factor due to the substantial amount of difference from its long term holding to its short term holdings. The short are evaluated on the bases of brokerage values as well as open market values. On the other hand the long term holdings are priced at cost due to the nature of the long holding, and are later re-evaluated when they are sold. These investments are overseen buy senior management, which is a separate division from investments. This infrastructure allows for a reliable valuation of the profits on a day to day basis. These forms or accounting are key to any business dealing with readily changing values such as Goldman Sachs, but the company has put many provisions in place to make sure these estimations are done properly. GS also employees an internal auditing committee to insure that all financial activities are meeting the standards of regulator agencies.

The next critical accounting principles are goodwill and identifiable intangible assets. These two are a key factor for investors to understand the financial values of all the acquisition of GS over the past 6 years. These acquisitions have different values; therefore the estimations of these values are clearly explained so any discrepancies can be resolved instantly. The explanations also explains how the goodwill is estimated, which in the case of GS, they use the net book value amount. These values are then clearly explained and shown in a spreadsheet format. The spreadsheet also breaks down the purchased and sold items (net yet sold, not yet purchased), which shows the constant updating of data. Now the identifiable intangible assets are amortized over the estimated useful life and re-evaluated if any circumstances arise. GS then follows